Cash debits/credits in undisclosed bank accounts unearthed during the course of assessment proceedings – theory of peak credit – how far applicable?

theory of peak credit

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Cash debits/credits in undisclosed bank accounts unearthed during the course of assessment proceedings – theory of peak credit – how far applicable?

THEORY OF PEAK CREDIT:

The principle of peak credit is pressed into service in a case where there are several credit and debit entries in one Bank account. The funds operated from such account is taken to be one and the same and, hence, to avoid multiple counting of the same sums, only the highest or peak of the amounts in that account would be taken as the unexplained cash credit.

The basic idea behind the peak credit theory is to avoid double addition and to bring only the actual income of the assessee to suffer tax, where there are large number of unexplained cash credit and debit entries.

Peak credit theory can be applied in a case where there is only rotation of funds whereby the funds withdrawn on earlier dates were deposited back subsequently and there were no fresh deposits. Thus, instead of aggregate of credit entries only the peak credit balance could be added.

In other words, only the income earned out of said unaccounted transaction should be taxed in the case instead of deposits/credit entries as only deposits cannot be the income of the assessee. For this purpose, the peak credit amount can be added to the total income of the assessee.

Useful references:

  • The theory of peak credit will be applicable only when there are deposits in cash and withdrawals in cash. In the case when the deposits are made in cash and most of the withdrawals are by way of clearing and not cash withdrawn, the theory of peak credit is not fully applicable to the facts of this case. [Shivraj Mishrilal Bafna Vs ITO (ITAT Pune), ITA No.434/PN/2013, A.Y. 200910, Date of Order17.06.2015]

  • Peak credit theory to be adopted for additions in respect of some unexplained cash credit entries in the bank statement. [ Kavita Rangwani vs. Income Tax Officer (Jaipur), ITA No.706/2012, ITO vs. Pawan Kumar- 38 taxmann.com 41]

  • “….two bank accounts of the assessee with Axis Bank and ICICI Bank Ltd. were not disclosed to the department. There is nothing with the department to suggest that entire deposit of Rs.2.46 crores represents the income of the assessee. However, the legal position on this issue is well settled that only the peak amount in such type of case could be added as income in the hands of the assessee and not aggregate of the total credit side of the account. In this case, therefore, the peak amount of two bank accounts with Axis Bank and ICICI Bank Ltd. taken together comes to Rs.22,58,223/-, and the same has been rightly added as income in the hands of the assessee” [CIT vs. Indrajeet Tomar, Tax appeal No. 908/2015]

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